The bond market is starting to price in a possible dent in fiscal credibility
Highlights:
Wage growth is running at an annual pace of about 3.5% y/y.
* Wage growth is impacted by a tight labor market and minimum wage hikes. Trend data point to recent moderation in wages.
* This is fairly rapid and will have some impact on inflation.
Business sector expectations for Q418 remain fairly robust.
Consumer confidence remains elevated, supported by wage/job growth.
* This is supportive of steady private consumption demand.
The BoI purchased USD 117ml in October, all within the scheme of neutralizing the impact of natural gas on the current account.
Last week, the shekel appreciated by 1.1% against the EUR and 0.2% against the dollar.
We currently expect inflation in Dec 18 to reach zero (previously 0.1%).
The fiscal deficit reached 3.6% GDP in the LTM, above 2.9% target.
* Tax revenues are expected to undershoot target by 2-3bn ILS this year.
* Spending is expanding rapidly and likely to overshoot target by 5-6bn.
* With 2019 to be an election year, it is unlikely to expect serious fiscal consolidation before 2020.
The bond market reacted to this threat to credibility as yields at the long end moved higher (6 basis points).
* The market is likely to continue to react as the deficit drifts higher.
Now read on...
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